Pages

Wednesday, December 26, 2012

Greatest Hits of 2012

The Conversable Economist--that's me--is taking the rest of the year off. For your delectation, here are 16 of the most-viewed posts that appeared in 2012, at least one from each month, listed here in reverse chronological order. Of course, I encourage you to spend your holidays surfing the archives as well.

Somewhat to my surprise, this post was by far the most popular of 2012. My idea was to provide an example of the structured analysis of a tradeoff that might be especially useful to classroom teachers and of mild interest to others. However, the post also clearly touched a broader audience and generated a wave of heartfelt reactions from people who just plain love their paper towels.

The standard story of China's economic growth involves a story of how low wages in China have combined with an undervalued exchange rate to create huge trade surpluses that drive economic growth. This post pokes some holes in that story. China's very rapid economic growth in the 1980s and 1990s didn't involve trade surpluses, which only started expanding in the 2000s when China's rates of wage growth were taking off. And China's currency was flat when the trade surpluses took off, and has how been strengthening for six years. The post proposes a different storyline for China's growth, rooted in how China's exports took off after China joined the World Trade Organization in 2001, and China's underdeveloped financial system had no way to turn all of these earnings by firms into national consumption.

Consider the situation of a low-income person who is eligible for various public support programs. However, each time that person earns an additional $1 in income, the amount of government support is reduced by, say, 30 or 40 cents. The economic incentives here are the same as those of a high marginal income tax rate. From this perspective, the marginal tax rates faced by the poor and the lower middle class are often just about as high as the marginal tax rates for those with high incomes.

Two famous economists of the past built hydraulic models of the economy: that is, economic models where flows of spending and saving, as well as price levels, were revealed by liquid flowing through a system of tubes and containers. Bill Phillips--the originator of the Phillips curve--built his model back in the late 1940s. Irving Fisher, the originator of much of modern monetary economics, built his model as part of his dissertation back in 1891. This post tells the story of the models--with pictures.

Driverless cars are coming: Google has already been testing prototypes on public roads. How might this invention change our lives? Fewer accidents. More productive or relaxing time spent in transit. More cars on the road, so less need for infrastructure. Greater energy efficiency. Remote parking--just tell your car to come and get you when you are ready. The possibility of shared cars, coming when you call. Greater mobility for those too young or too old to drive safely. Drive overnight, sleeping in your car, and arrive in the morning. The possibilities just keep coming.

It may seem that the answer should obviously be "yes," but a number of facts suggest a more nuanced answer. CEO pay relative to household income did spike back in the dot-com boom in the late 1990s, but since then, it is relatively
lower. CEO pay relative to the top 0.1%of the income distribution is now back to the levels common in the the 1950s. The pay of those at the top of other highly-paid occupations has grown
dramatically as well, like lawyers, athletes, and hedge fund managers. CEOs are fired sooner than they used to be, on average, especially when the stock price doesn't perform well.

A body of evidence from laboratory economics experiments suggests: 1) Groups are often more rational and
self-interested than individuals; and 2) This behavior doesn't always
benefit the participants in groups, because the group can be less good
than individuals at setting aside self-interest when cooperation is more
appropriate. The greater rationality of groups arises in part because when there is a problem to be solved, several people working on the problem are more likely to discern the best solution than just one person. But in some situations, cooperation can benefit all parties. This same evidence suggests that individuals are often better at putting aside narrow self-interest and looking to cooperative outcomes than groups. One ultimate goal in this literature is to figure out when it is more useful for organizations to operate through groups, and when it is more useful for organizations to delegate individuals to make decisions.

A Beveridge curve is a graphical relationship between job openings and the unemployment rate. The Beveridge curve seems to have shifted out in the last few years, meaning that for a given number of job openings, the unemployment rate is higher than it used to be. Some possible explanations include a mismatch between
the skills of unemployed workers and the available jobs; incentives from
extended unemployment insurance that have slowed the incentive to take
available jobs; and heightened uncertainty over the future course of the
economy and economic policy. Over the middle term, these factors should fade, and the unemployment rate will then fall.

In July, the unemployment rate seemed stuck at about 8%. However, certain more detailed measures of labor markets were showing signs of life. For example, the ratio of unemployed people per job opening had spiked above 6 at the worst of the recession, but by May 2012, the ratio had fallen to about
3.5. Hires had increased. Even the trend toward more people quitting their jobs in mid-2012 was probably good news, because people are more likely to quit when they perceive that other labor market options are available.

Once every three years the Federal Reserve carries out the Survey of Consumer Finance,which is the canonical source for data on household wealth. Results from the 2010 survey were just being released. One headline finding is that the median household wealth level fell from $126,000 in 2007 to $77,000 in 2010.

The study underlying this May 16 post looked at one set of jobs that are largely identical in countries around the world: food preparation jobs at McDonald's. It provides strong evidence that workers with the same skills are being rewarded very differently in different countries. I wrote: "[T]hese measures show that the most important factor determining wages
for most of us is not our personal skills and human capital, or our
effort and initiative, but whether we are using those skills and human
capital in the context of a a high-productivity or a low-productivity
economy."

At the end of this post, I wrote: "The question of why the U.S. spends more than 50% more per person
on health care than the next highest countries (Switzerland and
Netherlands), and more than double per person what many other countries
spend, may never have a simple answer. Still, the main ingredients of an
answer are becoming more clear. The U.S. spends vastly more on
hospitalization and acute care, with a substantial share of that going
to high-tech procedures like surgery and imaging. The U.S. does a poor
job of managing chronic conditions, which then lead to
episodes of costly hospitalization. The U.S. also seems to spend vastly
more on administration and paperwork, with much of that related to
credentialing, documenting, and billing--which is again a particular
important issue in hospitals. Any honest effort to come to grips with
high and rising U.S. health care costs will have to tackle these factors
head-on." I suspect that this post must have been assigned as reading to some classes, because the pageviews kept climbing steadily through the fall semester.

Nails may seem like an everyday product, but this analysis shows how their price has fallen dramatically over time, by a factor of about 15 from the mid-1700s to the mid-1900s. Back around 1800, nails alone could represent 10% of the cost of a house, and household purchases of nails were of the same magnitude, relative to GDP, as current household purchases of computers or of airfares. Even in a seemingly simple product, technological innovation has been quite dramatic: hand-forged, nails, cut nails, wire nails, and more recently the emergence of the nail gun.

Top marginal income tax rates used to be much higher back in the 1950s and 1960s, as high as 91%. This post looks at how top tax rates, and the money collected by those rates, changed over time. The tip-top rates applied to only a small group, and so the share of income taxes paid by those in the top tax brackets today is actually higher now than back in the 1960s. The marginal tax rates paid by those in the middle class were also often higher in the 1960s.

The title of this post refers to a pattern observed in China after several generations of the one-child policy: that is, a single child walking around a park, closely followed by two parents and four grandparents. A fertility implosion is coming around the world, and family reunions of the future are likely to be made up of four and five generations of relative, who will greatly outnumber the children on hand.

Every economics student at some point must confront the theory behind a Giffen good, which is the case in which a higher price for a good leads to people purchasing more of that good. I have usually taught the example as a theoretical curiosity, but some plausible evidence has emerged that in certain very low-income parts of China, rice is a Giffen good. In these areas, rice is a major part of the diet of poor people. When the price of rice rises, the effective buying power of their income is reduced, which then pushes them to give up on other items and consume even more rice.